Foreign Life Insurance and Savings Plans — U.S. Tax Rules
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Foreign life insurance and savings plans are policies and wrappers issued by non-U.S. insurers — whole-life and endowment policies, unit-linked investment bonds, and locally tax-advantaged savings products sold through banks and advisers abroad. For a U.S. citizen, the local tax advantages generally do not carry over, and the products bring reporting and tax rules most policyholders never hear about at the point of sale.
On this page
- Is a foreign life insurance policy reportable?
- Is there a tax just for paying premiums to a foreign insurer?
- Does the growth inside the policy stay tax-deferred?
- What about unit-linked and investment bonds?
- Do local "tax-free" savings accounts keep their status?
- How are payouts taxed?
- What should an expat do with an existing policy?
- Frequently asked questions
- Next step
Is a foreign life insurance policy reportable?
If it has cash value, yes. A policy with a surrender or cash value is a financial account for FBAR purposes and a specified foreign financial asset for Form 8938, valued at its cash surrender value. Pure term life with no cash value is not reportable. Annuity contracts issued by foreign insurers are reportable the same way.
Is there a tax just for paying premiums to a foreign insurer?
Yes — a federal excise tax on premiums paid to foreign insurers, at 1% for life insurance and annuities and 4% for property and casualty cover, reported quarterly on Form 720 by the policyholder. Treaties with some countries exempt their insurers; many don't. The amounts are small; the obligation is almost universally unknown and routinely unfiled.
Does the growth inside the policy stay tax-deferred?
Only if the policy meets the U.S. tax code's definition of life insurance, which is tested with actuarial formulas written for U.S. products. Many foreign policies — particularly savings-oriented ones with high cash value relative to the death benefit — fail. When a policy fails, the annual increase in cash value above premiums paid is taxable ordinary income each year, and the death benefit may lose part of its exclusion. The insurer won't tell you; the test has to be run.
What about unit-linked and investment bonds?
These policies invest premiums in funds, often the insurer's own. If the policy fails the life insurance test, the U.S. looks through to the underlying investments — and foreign funds inside a non-qualifying wrapper are passive foreign investment companies, bringing Form 8621 and the punitive PFIC tax. A product marketed locally as a tax-efficient wrapper can be among the worst assets a U.S. person can hold.
Do local "tax-free" savings accounts keep their status?
No. Tax-free savings accounts, individual savings accounts, education bonds, and similar wrappers are creations of local law; the U.S. taxes their income as ordinary interest, dividends, and gains each year, and treats funds inside them as PFICs. Only accounts protected by a treaty article (typically true pensions, not general savings wrappers) keep deferral.
How are payouts taxed?
If the policy qualified as life insurance, death benefits are generally excluded from income and surrenders are taxed only on gain above premiums. If it didn't, gain may already have been taxed annually, with records needed to avoid taxing it twice. Payouts in foreign currency are converted at the receipt-date rate, and a payout into a foreign account can trigger FBAR and Form 8938 thresholds.
What should an expat do with an existing policy?
Get it tested against the U.S. definition, report the cash value, file the excise tax going forward, and decide whether to keep, surrender, or replace it with a U.S. product. Surrendering a non-qualifying unit-linked policy may trigger PFIC tax on built-in gain — the calculation decides whether that's still the right move.
Frequently asked questions
I bought the policy years before I moved to the U.S. or became a citizen. Does it still apply?
Yes. U.S. rules apply from the first year you're a U.S. taxpayer, regardless of when the policy was bought.
My employer provides group life cover abroad. Is that reportable?
Not if it has no cash value. Employer-paid premiums above a threshold may be taxable compensation, as in the U.S.
Is the excise tax really enforced?
Rarely proactively, but it's a legal obligation with a form and a penalty, and it surfaces in audits of expats with foreign policies.
Can a treaty protect my savings wrapper?
Generally only if the wrapper is a pension or retirement plan covered by a pension article. Ordinary savings products are not.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you hold insurance or savings products from a foreign insurer or bank, our U.S. Tax Desk can test them against the U.S. rules and set the reporting straight. See pricing or book a free fit call.
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